High Noon for Hydrofracking?

December 20, 2012 at 7:51 am Leave a comment

imagesCAB9H0UMIt is totally understandable if five or ten years ago the legal implications of high volume hydraulic fracturing (HVHF) were not among your primary concerns.  But I’ve explained in previous blogs why I think if you live in the Southern Tier of New York, you should now be preparing for the implications of drilling on your mortgage property.  With the state having officially re-released for public comment regulations that will accompany any eventual state approval of the process and the state Department of Health reviewing the potential health effects of the drilling, a recent case gives credit unions that haven’t yet considered the issue further time to put the policies and procedures in place that will allow them to have greater oversight over their property.

In late November, the federal district court for the Northern District of New York rejected the claims of gas drilling companies that argued that leases set to expire could be unilaterally extended by the companies.  See Douglas Aukema; Patricia A. Aukema v. Chesapeake Appalachia, LLC and Statoilhydro USA Onshore Properties, Inc., 3:11-CV-00489. The drilling companies argued that New York’s moratorium on high volume hydrofracking, which has now been in effect since 2008, amounted to a “Force Majeure,” which means an event out of control of either party.  Most gas leases permit companies that have not been able to drill as a result of these event to extend gas drilling leases.  The court rejected this argument first because the gas companies were free to engage in gas drilling over the last five years, just not high volume hydraulic fracturing.  Second, the court said that the type of delays experienced by the company were foreseeable.

I would expect more and more of your members to be in a position to renegotiate lease terms.  Some banks in Pennsylvania have provided a service to members explaining lease terms to them.  More importantly, members should be put on notice that the credit union expects to see and has a right to review all lease terms before they are entered into.  Some of the more aggressive credit unions have used this leverage to ensure that lease payments are doled out in such a way so that mortgages get paid off first and have, on a case-by-case basis, rejected a lease on the mortgage property.

I like to say that lawyers are paid to be paranoid.  If you think I am telling you to discourage your members from entering into gas leases, I am not.  Pennsylvania has been using such drilling techniques for several years now and I’m not aware of one mortgage being rejected by either Fannie Mae or Freddie Mac.  What I am saying is that there are potential legal implications that your credit union can either deal with proactively or ignore and hope for the best.  The former course seems much more logical to me.

 

Entry filed under: Legal Watch, New York State, Regulatory. Tags: , , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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